The purpose of this article is to analyze the applicability of the Central Sales Tax Act, 1956 (‘CST Act’) and State VAT Acts to sales transactions that involve sale of goods to offshore locations. For the purpose of this analysis, offshore locations refer to offshore sites or installations falling beyond the territorial limits of India, but within the Exclusive Economic Zone (EEZ) or Continental Shelf of India as provided in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 ( ‘CSEEZ Act’).
The focus of this article is to reconcile two particular judgments that have led to the peculiar position concerning the applicability of sales tax on an offshore transaction. First, the High Court of Bombay in Commissioner, Sales Tax, Mumbai v. Pure Helium India Pvt. Ltd [(2012) 49 VST 14 (Bom.)] (‘Pure Helium’) has held that goods being transferred to the Bombay High region, beyond the territorial limits of India will not be considered as ‘in the course of export’ since Bombay High is not a foreign destination and is within the EEZ of India. Consequently, a sale made to the regions within Indian EEZ will not be treated as sales ‘in the course of export’. On the other hand, the High Court of Gujarat in its judgment in Larsen and Toubro Ltd. v. Union of India [(2011) 45 VST 361(Guj)] (‘Larsen and Toubro’ or ‘L&T’) held that a sale of goods to Bombay High was not a sale in the course of inter-State trade or commerce.
It is to be noted that these two decisions are not at all at loggerheads. While both decisions are based on transactions of sale of goods to the Bombay High region, the questions of law determined therein are entirely different. In Pure Helium, the High Court was only concerned with addressing the question as to whether such transactions of sale to offshore locations such as Bombay High could be said to be in the course of export under Section 5 of the CST Act. The judgment also consequently considered whether such transactions could be taxed as inter-state sales. On the other hand in L&T, the Gujarat High Court only specifically determined the second question considered in Pure Helium, i.e. the limited question as to whether such transactions of sale could be said to be in the course of inter-state trade or commerce under Section 3 of the CST Act.
In Pure Helium, the High Court referred with approval to Aban Loyd Chiles Offshore Limited v. Union of India [2008 (227) E.L.T. 24 (S.C.)], wherein such transfers to offshore sites was not held to be ‘export’. This was held in the context of the Customs Act, since the areas lying in the EEZ have been specifically extended to the Customs Act by a notification referred to in the judgment itself. In applying this decision, the High Court held that
“Export for the purposes of Section 5(1) of the CST Act 1956 cannot have a meaning which is divorced from the applicability of the Customs Act 1962 to a territory in pursuance of a notification issued in exercise of the powers conferred upon the Union Government in the Maritime Zones Act 1976.”
The court referred to the settled cases of Burma Shell Oil Storage and Distributing Co. of India Ltd. v. Commercial Tax Officer [(1960) 11 STC 764 (SC]) and State of Kerala v. Cochin Coal Co. [(1968) 21 STC 403 (SC)] in reiterating that for the exemption under Section 5(1) to apply, there must be a ‘foreign destination’ that the goods are intended to be exported to and the goods will not be in the course of export merely on account of being removed from the territory of India.
With specific reference to the decision of the Supreme Court in Burma Shell Oil Co. and Cochin Coal Co., it is to be noted that the extra-territorial concept of EEZ had not been recognized under Indian law in the Maritime Zones Act, 1976 when such decision was made. Therefore the emphasis on ‘foreign destination’ as referred to in the aforementioned cases has to be read with reference to the specific factual circumstances of these cases. In both the cases, the question involved was whether goods being sold for consumption during the voyage would be treated as goods for export. The courts held that there must be a destination for there to be an export. Since the Maritime Zones Act, 1976 had not yet come into existence, the only understanding of foreign destination was that of a foreign country, and areas with recognized limited sovereign rights such as the EEZ had not yet been contemplated. Further, as correctly held in Aban Loyd Chiles Offshore Limited itself, “in respect of the continental shelf and exclusive economic zone, India has certain limited sovereign rights which cannot be equated to extending the sovereignty of India.” Hence, the areas within the EEZ have been legally recognized as being beyond the conventional sovereign territorial limits of India.
Therefore, it can be said that the aforementioned cases relied upon by the High Court of Bombay in Pure Helium only squarely dealt with the issue of sales for consumption during a voyage or journey with no destination, whether foreign or otherwise. The existence of the EEZ and Continental Shelf area is a relatively new concept that cannot be necessarily applied in conjunction with the cases referred to by the High Court. Therefore, the question as to whether a sale transaction to offshore destinations within Indian EEZ and Continental Shelf is or is not in the course of export, can only be decided by legislative intervention.
As noted above, the Gujarat High Court in L&T held that a sale transaction involving sale of goods to an offshore location within the Indian EEZ such as Bombay High was not an inter-State sale. However it additionally specifically held that
“it clearly emerges that when the sale of goods took place at Bombay High, for which the goods moved from Hazira to Bombay High, such movement does not get covered within the expression "movement of goods from one State to another" contained in clause (a) of Section 3 of CST Act…since, in our opinion, Bombay High does not form part of any state of Union of India..”(emphasis supplied)
Thus, in essence, the reason for holding that the transaction was not an inter-State sale was based on the determination that Bombay High did not form part of any state in India. This reasoning also marks the point of convergence between the judgments of the Bombay and Gujarat High Courts. On the same lines, the High Court of Bombay in Pure Helium had noted as follows:
“A movement of goods from the State of Maharashtra to Mumbai High does not constitute a movement from one State to another State. Mumbai High does not form part of any State in the Union of India. Hence, we hold that the basis on which the revenue sought to assess the sale as an inter-State sale involving a movement of goods from the State of Maharashtra to Mumbai High was contrary to the mandate of the provisions of Section 6 of the CST Act.”
As a result, both the High Courts have expressly agreed on the view that such offshore locations such as Bombay High, cannot be considered to be a part of any state in India. Therefore, a sale made to Bombay High, within the limits of the EEZ, cannot be treated as either a sale in the course of export under Sec. 5(1) of the Central Sales Tax Act, 1956 nor can it be treated as an inter-State sale under Sec. 3, since the Bombay High region is not within any state of India.
This leads to the peculiar position that the sale within the EEZ and Continental Shelf limits of India can neither be considered to be a local sale nor an inter-state sale nor a sale in ‘the course of export’. However, this aspect too has been specifically considered in Larsen and Toubro, wherein the court held as follows:
“In the case of Murli Manohar and Co. and Anr. v. State of Haryana and Anr. (supra), the Apex Court did observe …that "We are unable to conceive of a fourth category of sale, which could be neither a local sale nor an inter-State sale nor an export sale.”.. (However), It was not a case where the sale of goods occasioned the movement from the Indian State to a territory which is not part of India and which is for the limited purpose of claiming rights to exploit the natural resources and exploration etc. the Indian Union claims limited sovereign rights.” (emphasis supplied)
In conclusion, all such transactions of sale, wherein the goods are appropriated at offshore locations such as Bombay High, within the EEZ and Continental Shelf limits of India, will not attract sales tax, either under the Central Sales Tax Act or under the respective State VAT Acts. The question then arises as to the manner in which this lacuna can be plugged, since taxes from sale transactions ultimately form a large part of the revenue available to states. It was held by the a 5 judge bench of the Supreme Court in the case of State of Andhra Pradesh v. National Thermal Power Corporation [(2002) 5 SCC 203] that the situs of a sale cannot be artificially fixed in such a manner as to create a territorial nexus to tax an inter-state sale, unless permitted by appropriate central legislation.
However, even this restriction on the legislative powers of a State has been imposed, if read closely, only against fictionally trying to tax transactions of inter-state sale or import sales as intra-state sales. It can therefore be argued that this restriction on a State artificially fixing situs will only apply when there is colorable penetration of the powers available to the Centre under the CST Act. However, transactions involving sales to offshore locations within the Indian EEZ and Continental Shelf regions as discussed are presently neither covered by the CST Act nor by the respective State VAT Acts. Consequently, it is possible for States to assert that since there is no invasion of Central taxing powers over sale transactions, they may be able to plug the lacuna of offshore sales, by treating them as local sales from the place of movement of the goods. This position will however, run the natural risk of a constitutional challenge and the better view will be for the necessary amendments to be made in the CST Act. Consequently, until this position is adequately taken care of by necessary amendments in the CST Act or by the respective state VAT Acts, the latter option running the risk of a constitutional challenge, all such sale transactions as specifically discussed hereinabove will prima facie not attract sales tax under any legislation.
[The author is an Associate, Lakshmikumaran & Sridharan, Mumbai]